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How can I pass my Isa money to my family?

This retired investor is using her £100,000 Isa to generate surplus income. But she also wants to leave the money as an inheritance to her daughters and grandchildren.

Anne is 66 and has stocks-and-shares individual savings accounts (Isa) worth almost £100,000. She holds these in two separate Isa accounts with different providers. She says: "I am investing the £70,000 in my Fidelity Isa for income. However, I am wondering whether I can put the money in a drawdown pension, which my two daughters could inherit without being subject to tax. I have also thought of gifting £3,000 a year to my daughters and five grandchildren.

"I am moderately adventurous and versatile with regards to investment risk, although with the uncertainty of outcome of UK elections perhaps I should be more cautious.

"My Fidelity portfolio for the most part was selected by my independent financial adviser (IFA) almost two years ago. I am due a review and need to decide whether I carry on using him. However, I do have an interest in Latin America, so my Invesco Perpetual investment was a punt. I also backed Neil Woodford's CF Woodford Equity Income fund from inception, switching money from the Invesco Perpetual High Income fund he used to manage.

"My First Direct Isa holdings were selected when I have had fun reading your articles. I used them as a challenge to see if I could beat the FTSE 100 index, which I have succeeded in doing."

Anne has a monthly income of £2,200 from pensions and a buy-to-let property worth £50,000 that generates £275 income per calendar month. Her house is worth £240,000 and she has cash Isas and savings worth £7,600.

Reader Portfolio
Anne 66
Description

Stocks-and-shares individual savings account

Objectives

Income and leaving a legacy

  

ANNE'S ISA PORTFOLIO

Name of share or fundNumber of shares/units heldPrice Value
FIDELITY ISA 
Baillie Gifford American Fund B Acc (GB0006061963)2,229349.5p£7,790
First State Global Emerging Mkts Leaders (GB0033873919)985.57449.9p£4,434
Henderson European Selected Opps I Acc (GB0032473653)5531,366p£7,553
Invesco Perp Latin American Z Acc (GB00B8N44B34)1,938.56158.22p£3,067
JOHCM UK Equity Income Y Acc (GB00B8FCHK57)4,539.83£1.20£5,447
JPM  US Equity Income C Acc (GB00B3FJQ482)4,679.77£1.73£8,096
Jupiter European I Acc (GB00B5STJW84)502.961479.96p£7,443
Royal London UK Equity Income M Acc (GB00B8Y4ZB91)3,246.63158.7p£5,152
Schroder Small Cap Discovery Z Acc (GB00B5ZS9V71)6,817.6570.59p£4,812
Schroder UK Opportunities Z Acc (GB0007218398)1,658.42442.3p£7,335
CFWoodford Equity Income C Inc (GB00BLRZQ620)3,327.61113.48p£3,776
ISA Cash Park 7,017£7,017
First Direct ISA 
Chesnara (CSN)650361.33p£2,348
Derwent London (DLN)503378p£1,689
City of London  IT (CTY)984401.4p£3,949
Diageo (DGE)751935p£1,451
Hays (HAS)1000154.1p£1,541
Invesco Perpetual Enhanced Income (IPE)6,46276.6p£4,949
Persimmon (PSN)1751792p£3,136
Wincanton (WIN)1250172.5p£2,156
Witan IT (WTAN)430785.51p£3,377
Hill and Smith Holdings (HILS)                  200572p£1,144
Fyffes (FFY)             1,50084.84p£1,272
GlaxoSmithKline (GSK)201552.75p£310
TOTAL£99,244

Source: Investors Chronicle. Price and value as at 2 March 2015

 

Chris Dillow, the Investors Chronicle's economist, says:

You seem to be misusing your financial adviser. You ask whether you can put £70,000 into a drawdown pension which your daughters can inherit. You can't put that much in, in a single year. How much you can do so depends upon your and your daughters' personal circumstances.

This, though, is precisely the question financial advisers should help you with. They should be able to guide you through the changing maze of bureaucracy, giving advice tailored to your individual situation. What they are much less useful at is telling you how to invest. This is simply because they - being human beings like the rest of us - cannot foresee the future. In fact, there's evidence from around the world that advisers' recommendations are worse than useless. This might be true, even for a wholly unbiased adviser, if his overconfidence leads him to see good investments where none actually exist.

With respect, I fear you have been a little ill-advised. Much of this portfolio consists of expensive actively managed funds. I'll make a concession that many efficient market fundamentalists wouldn't and say there might be a case for having a bet on an individual fund manager's ability; there's nothing egregiously wrong with backing Neil Woodford. The problem is that if you hold several funds, you are diluting the returns that a skilful manager might deliver and so end up with a portfolio that delivers tracker-fund-type performance (nothing wrong with that), but with higher fees (plenty wrong with that).

I'd consider switching some of your funds into lower-cost trackers.

Another feature of your portfolio is that it has a very low weighting in cash and bonds. The problem here isn't that the impending general election is creating uncertainty. I agree that it is, and that this could hurt share prices. But you have some protection against this simply by virtue of your overseas equity funds.

Instead, the problem is simply normal equity volatility. An ordinary global bear market could do big damage - especially if you're planning on drawing down these investments to top up your pension income. I would plan on the basis that this portfolio has almost a one-in-three chance of losing 10 per cent or more over a 12-month period and almost a one-in-five chance of losing 10 per cent or more over five years, in inflation-adjusted returns. If you live for another 20 years, it is very likely indeed that you'll see at least one five-year period in which you lose so much.

Could you cope with such a loss? Is the 50-50 chance of a 5 per cent annual return or better sufficient compensation for such a danger? If the answer to either of these questions is no, then you are overexposed to equities.

One further thing. You say you've succeeded in beating the FTSE 100. Be careful about how much importance you attach to this. A belief in your success can lead to overconfidence, which leads to bad investments. And beating the FTSE 100 isn't necessarily a sign of skill. You can do it if smaller stocks beat mega-caps - in which case most stocks would beat the FTSE 100 - or simply by taking on a lot of risk and getting lucky.

What matters is that you have a portfolio that you are comfortable with, which avoids unnecessary charges, and which does not excessively jeopardise your future living standards. It's nice to beat the market, but not necessary.

  

Colin Low, a chartered financial planner with Kingsfleet Wealth, says:

You highlight issues that are commonplace for those who are reaching retirement. Often we find that, once an individual has established a comfortable level of income from which they are able to meet all their regular expenses, then their thoughts turn to how they can pass their assets to their beneficiaries in as efficient a way as possible.

From your brief description it would appear as though you feel comfortable with your current level of deposit savings to provide for any emergency that could arise. This is an important aspect to address before moving on to longer-term investing. Your query revolves around whether your Isa would be better invested in a pension arrangement in order to benefit from the new legislation which enables benefits to be passed more tax-efficiently on death. I note that you have an existing pension arrangement which could accommodate additional contributions and still permit drawdown at the same time - and this could, indeed, be part or all of your solution.

To benefit from tax relief on pension contributions, they must not exceed an individual's earned income in any tax year subject to a maximum level, usually £40,000. However, any individual under 75 can contribute £3,600 gross (£2,880 net) to a pension contribution in any tax year without having any earned income and this would permit some additional pension funding, dependent on your circumstances.

It is worth highlighting one or two key issues in relation to inheritance tax, but also a further way that you may wish to consider dealing with your dilemma. For the record, inheritance tax is liable on any estate exceeding £325,000 (nil rate band) and any sum in excess of this figure is charged at 40 per cent. Spouses may receive the unused nil rate band from a late partner.

There are a number of allowances and reliefs that are often overlooked in inheritance tax planning, such as the option to make gifts out of excess income on a regular basis and the annual gift allowance which permits total gifts of £3,000 per donor and not per recipient. Small gifts of up to £250 per year are able to be given to any individual in any tax year.

However, one very straightforward solution which may require some additional research is the possibility of investing an Isa in companies listed on the Alternative Investment Market (Aim). This is treated as a regular investment Isa during life, namely that all capital gains and income derived are not subject to further tax but, the most beneficial aspect for you, would be the exemption from inheritance tax after a two-year period. This is because Aim shares qualify as being exempt from inheritance tax as they are treated as a 'business property asset' falling outside an estate two years and one day after they were invested. As the funds would be transferred from an existing Isa, the Isa 'wrapper' could be maintained.

Although the inheritance tax benefit only applies if the assets are held at the date of death, most providers that offer these solutions allow access to these funds without penalty, so should an emergency arise you would still be able to access the funds. It is possible to simply purchase Aim shares within an Isa but, because of the higher risk that Aim shares present, a managed fund Aim Isa from providers such as Octopus, Stellar or Puma may be a more appropriate purchase. You will have to pay the fund manager's fees for managing these. As Aim shares are highly volatile areas of investments very great care or independent advice should be taken before investing.